Question

Does empirical evidence generally support EMH in weak or semi-strong form efficiency? Please provide some examples of the supportive evidence or evidence against it.

Answer 1

Empirical evidence generally is not supportive of the EMH in weak or semi-strong form of efficiency. This can be supported by the following examples:

1) When a weak form of efficient market hypothesis exists, it believes that past information on prices cannot predict future prices since the current prices already incorporate them. As a result, technical analysis is of not much use and cannot be used to beat the market. However, empirical evidence of success stories of the likes of Warren Buffet who is a well known technical analyst shows that he has been able to beat the market on multiple occasions so this is an evidence that contradicts the weak form efficiency.

2) Semi-strong form of market efficiency believes that current prices incorporate all information past and present. Also, prices are able to incorporate any new information immediately. Hence, one cannot beat the market. However, there are certain fundamental analysts who by studying about various company related factors like P/E ratios, financial statements, etc have been able to beat the market. One such person is John Neff who is a propounder of value investing and believes market's response to latest news can be slow and one can easily beat the market through prompt action. Also, there are certain market anomalies which tend to move away from this semi-strong efficiency. Another empirical evidence was a study by Beechey et al. (2000, cited in Watson & Head, 2010), that showed how small firms were able to give more returns in the long run that large firms. Hence, higher the risk, the greater the returns.